Protection vs. patent trolls?
October 21, 2011 10:02 AM   Subscribe

How might one structure a company for maximum resilience against patent trolls?


Is it possible to develop a corporate structure that would let elements of the company survive, or even entirely ignore, an attack by someone like Lodsys/IV? The idea would not be to survive legitimate patent attacks, but rather to structure the organization such that it's a very "hard target" and thus not worth suing for troll purposes. It seems like this should be possible.

Let me re-emphasize: the idea is not to ignore genuine patent suits, but rather to be so obviously expensive to successfully sue that scumbags like Myhrvold look elsewhere for their next extortion target because the cost/benefit ratio just isn't there for them.

If it helps, assume the primary (but not only) target market for this company is the US, and that it does not presently exist. You can also assume familiarity with Nolo-book level concepts, as well as prior-but-not-useful posts on similar topics (e.g.). And, seriously, not interested in "well just don't steal!" answers. Assume good faith on the part of the operators, who just want to avoid being sued because they use the internet. Again: protection from trolls is the attribute being sought, not some kind of fake legal immunity. All locks can be broken, I know.

Relative protection from trolls; the hardest target on the block, so that they go bust up someone else instead. That's all.
posted by aramaic to Law & Government (7 answers total) 5 users marked this as a favorite
You can get patent insurance. The only other main defense is your own large patent portfolio.
posted by bitdamaged at 10:06 AM on October 21, 2011

Look into bankruptcy tactics. Friend of mine lost a contentious lawsuit, declared his company bankrupt, transferred everything to a new company, and ended up owing nothing except the legal fees incurred to make this move.
posted by Cool Papa Bell at 10:15 AM on October 21, 2011

I am an IP attorney, but I am not your IP attorney. This is not legal advice.

You should consult a competent IP and corporate attorney in your jurisdiction. Business organization is a complex topic, and the best answer here will depend on the particular jurisdiction you operate in, your budget, the area of technology, the specific technologies used, the business model, the timeline (e.g. ongoing changes in the law such as the America Invents Act will influence the optimal business structure), and many other factors. Most people who can give you good advice in this area cannot ethically respond to you in this forum (nor would you want them to do so, actually), and those who can respond likely cannot give you good advice.

Finally, I'll note that your question is vague. You want the company to "survive" a patent troll lawsuit, but patent trolls are not in the business of suing companies out of existence. What they want is a steady stream of licensing revenue. It's not in their interest to bankrupt a company, as they will likely see nothing once the secured creditors are paid off. So in that sense your question is moot.
posted by jedicus at 10:23 AM on October 21, 2011 [1 favorite]

The short answer is "Probably not."

The longer answer is "Any corporate structure which is clearly just a dodge to avoid a particular kind of liability but has no other commercial function is likely to be disregarded by the courts anyway." Even if not outright disregarded, the fact is that corporate parents and sometimes even corporate siblings can frequently be held liable for the infringing activities of subsidiaries or co-subsidiaries.

But bitdamaged is right: you can buy insurance for this, and insurance can actually make defendants a "hard target". Insurance means not only do you have enough money to pay a goodly chunk of any claim without hurting the company at all, but you don't have to pay for your defense. All of a sudden you've got a defendant with absolutely no incentive to settle, while you've got a plaintiff shelling out $500 an hour in legal fees. A plaintiff in such a situation is likely to accept a far smaller settlement than they otherwise might.
posted by valkyryn at 10:34 AM on October 21, 2011 [1 favorite]

Response by poster: "Any corporate structure which is clearly just a dodge to avoid a particular kind of liability but has no other commercial function is likely to be disregarded by the courts anyway."

That is of course technically true, but is it functionally true?

At a bare minimum from the direct experience of friends the dodges can work to increase the cost of litigation to the point that it is not worth pursuing even if you were clearly wronged. Perhaps they were simply unlucky, but bizarre corporate structures did seem to be effective for their opponent, and now I wish I had paid much more attention to their case, but I'm sorta unwilling to go make them re-live it now.

Anyway, their experience implies that there is a range of claim values which cannot be cost-effectively pursued given sufficiently complex structures on the part of the potential defendant; I am interested in learning more about those structures, and how one might increase the cost of litigation in a cost-effective way. I'm not interested in defending against Apple; I'm interested in being able to defend against an NPE who claims control over the idea of clicking things on a website and wants $500K + $0.25/click and the like. If it would cost $2 million to successfully sue me for $500K, they'll find someone else to harass.

To clarify a further point regarding survival of the corporation, "survival" can be taken loosely. The only thing which matters is continued survival of the core assets. So, Shell Company A goes bankrupt, Shell Company B survives. Or they all die, and are replaced by something new incorporated in India or wherever, ping the nameservers & it's all good. That sort of thing. I'm prepared to terminate the company upon receipt of a demand letter, only to respawn it elsewhere under different terms. Companies can come & go. Bank accounts can come & go. It works for criminals, now I want it to work for me.

Related: is there a technical phrase for patent troll insurance, or are folks just referring to things like RPX?
posted by aramaic at 11:46 AM on October 21, 2011

Yes, RPX is a good example of what I'm talking about. But a lot of the main commercial insurance carriers will have some relevant product, as it's a pretty common concern.

It works for criminals, now I want it to work for me.

But it doesn't really work for criminals. At least not in the long run. People go to jail for money laundering. And doing this will just serve to make you look bad if not actually establish that you're doing what you're doing willfully, thus exposing yourself to additional statutory damages and potentially even liability for the plaintiff's attorney's fees. The latter means that any value can be worth pursuing, because the defendant will have to pay the other side's litigation costs in addition to their own.

Playing corporate whack-a-mole isn't going to do much to discourage a dedicated civil litigator, and if anything, may attract the attention of prosecutors.
posted by valkyryn at 2:22 PM on October 21, 2011

This might be trite, but don't use processes that are patented.
posted by gjc at 8:56 PM on October 21, 2011

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